1929 Crash being a Boglehead?

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1929 Crash being a Boglehead?

Post by magneto » Wed Jul 03, 2013 10:45 am

Have re-read JK Galbraith 'The Great Crash 1929' and have also been re-watching a TV program on the Wall Street Crash. Wondering how a Boglehead would have survived rebalancing into the falling stock market, and whether we can learn anything from that period of history to safeguard our financial futures.
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Re: 1929 Crash being a Boglehead?

Post by Randomize » Wed Jul 03, 2013 10:59 am

Not really specific to the crash but more to the depression in general, the key lesson was to own treasuries. Not only were the Feds the only ones paying their bills but rates slowly fell between 29 and WWII so even with rates low (3.6% => 2%), there would have been some price gains to make up for it. If, like many bogleheads, you had a significant portion of your money in T-Bonds (preferably long-term ones), you'd have been feeling pretty darned good about your finances.

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Re: 1929 Crash being a Boglehead?

Post by SimpleGift » Wed Jul 03, 2013 11:23 am

magneto wrote:...whether we can learn anything from that period of history to safeguard our financial futures.
Though the 1920-1930 run-up and crash was really in a league of its own for the U.S., one big lesson from the history of market crashes is the consistency of recovery. If one looks at U.S. stock crashes over the last century (chart below), the market invariably overshoots on the downside (from fear and panic), but then over the next 500 days regains a lot of its losses (red lines). This pattern is true world wide, even during the post-war crashes in Japan, Germany and Italy.

The lesson is to hang in there, ignore the panic and keep your eye on your long-term goals.

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Source: Doug Short
Last edited by SimpleGift on Wed Jul 03, 2013 11:25 am, edited 1 time in total.
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Re: 1929 Crash being a Boglehead?

Post by Call_Me_Op » Wed Jul 03, 2013 11:25 am

A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
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Re: 1929 Crash being a Boglehead?

Post by allsop » Wed Jul 03, 2013 11:39 am

A strange question.

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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 11:44 am

Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
Moreover, they were the only safe place to hold "cash" (i.e. something not crashing to the ground). Every bank got in trouble sooner or later back then and froze deposits. The FDIC is a godsend. Can you imagine having to sell your bank dollars for 50c in an underground market to get food on the table?

I think rebalancing between 1929-1932 would have got us in some trouble, but probably still better than none at all. And we'd have been far better off than everyone who didn't have a balanced portfolio. Somebody could run the numbers.

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Re: 1929 Crash being a Boglehead?

Post by IlliniDave » Wed Jul 03, 2013 12:02 pm

magneto wrote:Have re-read JK Galbraith 'The Great Crash 1929' and have also been re-watching a TV program on the Wall Street Crash. Wondering how a Boglehead would have survived rebalancing into the falling stock market, and whether we can learn anything from that period of history to safeguard our financial futures.
That's one of the reasons some will advise you only rebalance once every year or two, so you don't dump all your marbles on the downslope of a market that might have a long way to descend yet. Most (but not all) bad markets tend to bottom out and start back up within a year or two "they" say.
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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 1:00 pm

ogd wrote:
Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
Moreover, they were the only safe place to hold "cash" (i.e. something not crashing to the ground). Every bank got in trouble sooner or later back then and froze deposits. The FDIC is a godsend. Can you imagine having to sell your bank dollars for 50c in an underground market to get food on the table?

I think rebalancing between 1929-1932 would have got us in some trouble, but probably still better than none at all. And we'd have been far better off than everyone who didn't have a balanced portfolio. Somebody could run the numbers.
Robert Shiller's data for that era indicates in real (after inflation) terms, a yearly rebalanced 50-50 S&P500 (dividends reinvested) and 10 year treasury ladder would have been fine

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Re: 1929 Crash being a Boglehead?

Post by btenny » Wed Jul 03, 2013 1:02 pm

How did corporate bonds do during this period? Because many of us here have moved a good portion of our bond stuff to pure coroporate funds for better yields.

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Re: 1929 Crash being a Boglehead?

Post by zaboomafoozarg » Wed Jul 03, 2013 1:05 pm

Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
What about these Bogleheads? http://www.bogleheads.org/forum/viewtop ... 0&t=117368

:D

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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 1:19 pm

btenny wrote:How did corporate bonds do during this period? Because many of us here have moved a good portion of our bond stuff to pure corporate funds for better yields.
Corporate bonds provide a default risk premium whilst treasury's have no (very low) default risk (can always print money or raise taxes). Moving to corporate funds for higher yield just exposes yourself to the default risk, such that overall it all washes towards similar rewards (defaults however tend to cluster so you benefit for periods of time, but then pay a large amount back at or around a similar date). Larry's posted some links to where he suggests that its better to push yield by taking on more stock exposure than it is to push yields by moving more into junkier/riskier bonds.

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Re: 1929 Crash being a Boglehead?

Post by Ged » Wed Jul 03, 2013 1:22 pm

btenny wrote:How did corporate bonds do during this period? Because many of us here have moved a good portion of our bond stuff to pure coroporate funds for better yields.

Bill
You may find this paper interesting:

Corporate Bond Default Risk: A 150-Year Perspective

http://www.nber.org/papers/w15848

"We study corporate bond default rates using an extensive new data set spanning the 1866–2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of 1873–1875, total defaults amounted to 36 percent of the par value of the entire corporate bond market. We examine whether corporate default rates are best forecast by structural, reduced-form, or macroeconomic credit models and find that variables suggested by structural models outperform the others. Default events are only weakly correlated with business downturns. We find that over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points. We also find that credit spreads do not adjust in response to realized default rates."
Last edited by Ged on Wed Jul 03, 2013 1:47 pm, edited 1 time in total.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 1:31 pm

zaboomafoozarg wrote:
Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
What about these Bogleheads? http://www.bogleheads.org/forum/viewtop ... 0&t=117368

:D
Even 100% stocks wasn't as bad as you might believe. There was some deflation (negative inflation) during those years - look at how CPI dropped from 19.3 in 1920 down to 12.9 in 1933 for instance. So in real terms (dividends reinvested) :

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OK provided you don't mind roller-coaster rides.

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Re: 1929 Crash being a Boglehead?

Post by stevewolfe » Wed Jul 03, 2013 1:34 pm

A lot of Bogleheads likely would've been in trouble as the posts above really haven't mentioned the dearth of actual cash in circulation. Yes, maybe today the FDIC would protect us from some of that problem, but it just gives a backstop to the hoarding of cash that existed at the time.

Nisi has quoted from Benjamin Roth's "Great Depression a Diary" so often I bought a copy to read. In it he repeatedly mentions that professional people had no cash to invest. Paraphrasing, a doctor was rubbing a $1 bill on the edge of the desk saying that was the only cash he had received in a month.

Were a freeze up like this to happen again, rebalancing with new monies, boldly rebalancing from treasuries or other guaranteed savings accounts into stocks would truly take a will of steel and much more nerve than at any point in my lifetime.

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Re: 1929 Crash being a Boglehead?

Post by wesleymouch » Wed Jul 03, 2013 1:42 pm

ogd wrote:
Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
Moreover, they were the only safe place to hold "cash" (i.e. something not crashing to the ground). Every bank got in trouble sooner or later back then and froze deposits. The FDIC is a godsend. Can you imagine having to sell your bank dollars for 50c in an underground market to get food on the table?

I think rebalancing between 1929-1932 would have got us in some trouble, but probably still better than none at all. And we'd have been far better off than everyone who didn't have a balanced portfolio. Somebody could run the numbers.
FDIC is not the panacea you think it is. Read about "bail in". In these times custodial risk is as great as market risk.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 1:50 pm

Ged wrote:
btenny wrote:How did corporate bonds do during this period? Because many of us here have moved a good portion of our bond stuff to pure coroporate funds for better yields.

Bill
You may find this paper interesting:

Corporate Bond Default Risk: A 150-Year Perspective

http://www.nber.org/papers/w15848
We find that over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points

...Interesting - but ...

we study the determinants of corporate default risk using a number of variables suggested by theoretical models of credit risk. The results indicate that the variables suggested by structural models have significant forecasting power for corporate default rates. In particular, stock market returns and stock market return volatility have significant predictive ability.

there may be a risk that just when you need bonds to have maintained their value the most i.e. when stocks are down deeply, that corporate defaults might detract from how much more stock is being added at relatively low price levels - which might mitigate that 0.8% premium.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 2:16 pm

wesleymouch wrote:FDIC is not the panacea you think it is. Read about "bail in". In these times custodial risk is as great as market risk.
In the UK a decade or two ago, bank deposits were only covered by the government (if the bank went broke) to the tune or something like 95% of the first $50,000. Anything deposited above that could have been lost if the bank went broke.

The EU in more recent times raised that to something like $135,000 being fully covered - anything above that being at risk if the bank went broke.

The natural tendency was towards spreading deposits across multiple banks, restricting each bank deposit to the government 'insured' amount.

Conceptually the 2008/9 crisis should have exercised that policy first - to make deposits of above the 'insured' amount, together with bond holders, stock holders and credit default swaps to bear the cost of failure first, rather than taxpayers in general.

To date AFAICT only Cyprus and Iceland have exercised the policy. The rest of Euroland have opted to fully cover credit default swaps etc. to bear no risk. If someone buys a credit default swap - then they should bear the risk of losing - and not having taxpayers cover them on a heads they win, tails taxpayers bail them out basis.

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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 2:23 pm

Clive wrote:
ogd wrote:
Call_Me_Op wrote:A Boglehead would have done fine, as he or she would have owned a healthy portion of high-quality bonds. These bonds soared during the Great Depression.
Moreover, they were the only safe place to hold "cash" (i.e. something not crashing to the ground). Every bank got in trouble sooner or later back then and froze deposits. The FDIC is a godsend. Can you imagine having to sell your bank dollars for 50c in an underground market to get food on the table?

I think rebalancing between 1929-1932 would have got us in some trouble, but probably still better than none at all. And we'd have been far better off than everyone who didn't have a balanced portfolio. Somebody could run the numbers.
Robert Shiller's data for that era indicates in real (after inflation) terms, a yearly rebalanced 50-50 S&P500 (dividends reinvested) and 10 year treasury ladder would have been fine
Thanks Clive! But I must say that under those extreme deflation conditions, real returns are no longer reassuring. E.g. I still need to pay my mortgage. It would be nice to see nominal returns, and specifically the effect of rebalancing on them (was it a bonus or a penalty?). The "feints" of the market until circa 1938 played havoc with all investors, particularly because leverage was more fashionable for individuals back then.

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Re: 1929 Crash being a Boglehead?

Post by Ged » Wed Jul 03, 2013 2:38 pm

Clive wrote:Conceptually the 2008/9 crisis should have exercised that policy first - to make deposits of above the 'insured' amount, together with bond holders, stock holders and credit default swaps to bear the cost of failure first, rather than taxpayers in general.

To date AFAICT only Cyprus and Iceland have exercised the policy. The rest of Euroland have opted to fully cover credit default swaps etc. to bear no risk. If someone buys a credit default swap - then they should bear the risk of losing - and not having taxpayers cover them on a heads they win, tails taxpayers bail them out basis.
It's a two-edged sword. Under non-systemic risk conditions the normal insurance policy, either FDIC or EU makes perfect sense. However when systemic failure and massive deflation are the threat then extraordinary measures may be required. These measures are very dangerous; the full effects are TBD. Many economists will earn PhDs studying this.

Cyprus is encouraging actually because it was a reversion to non-extraordinary policy.

The idea that 'bail-in' somehow means that the FDIC is somehow in play is in my opinion not correct. If anything it's a sign that FDIC style rules are the norm again. The system is slowly getting back to pre-2008 norms.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Wed Jul 03, 2013 2:44 pm

stevewolfe wrote:Were a freeze up like this to happen again, rebalancing with new monies, boldly rebalancing from treasuries or other guaranteed savings accounts into stocks would truly take a will of steel and much more nerve
Maybe, maybe not, depending upon how often you look to review and rebalance. Once yearly reviews, rebalancing whenever either bonds or stocks were at 40% or less weighting at that time and :

Image
EDIT : OPPS! - chart should read NOMINAL gains (not real gains)

in 1930 and again in 1931 you would have moved 10% of total portfolio value from bonds into stocks.

A couple of years earlier however (1928) and you would have moved 10% from stocks to bonds.

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Re: 1929 Crash being a Boglehead?

Post by JW-Retired » Wed Jul 03, 2013 3:03 pm

stevewolfe wrote:A lot of Bogleheads likely would've been in trouble as the posts above really haven't mentioned the dearth of actual cash in circulation. Yes, maybe today the FDIC would protect us from some of that problem, but it just gives a backstop to the hoarding of cash that existed at the time.

Nisi has quoted from Benjamin Roth's "Great Depression a Diary" so often I bought a copy to read. In it he repeatedly mentions that professional people had no cash to invest. Paraphrasing, a doctor was rubbing a $1 bill on the edge of the desk saying that was the only cash he had received in a month.

Were a freeze up like this to happen again, rebalancing with new monies, boldly rebalancing from treasuries or other guaranteed savings accounts into stocks would truly take a will of steel and much more nerve than at any point in my lifetime.
+1
Yes, give B. Roth's Depression Diary a read. He was a lawyer with a keen interest in the stock market. Roth repeatedly remarks at the market dips during the decade of depression that if only he had some treasuries or other money, "good stocks" were at real bargain prices. He never did have any money to invest. Nobody he knew had much money. Rebalancing into more stocks is not going to happen when no money is coming in, your mortgage is miles under water, your real estate is near worthless and the tenants can't pay the rent, you have lease payments due but your business has few customers, family have lost their jobs..... i.e., it's a real Depression where all this stuff happens. Those lucky few who had any assets were spending them very sparingly and only on critical necessities.
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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 3:09 pm

JW Nearly Retired wrote:+1
Yes, give B. Roth's Depression Diary a read. He was a lawyer with a keen interest in the stock market. Roth repeatedly remarks at the market dips during the decade of depression that if only he had some treasuries or other money, "good stocks" were at real bargain prices. He never did have any money to invest. Nobody he knew had much money. Rebalancing into more stocks is not going to happen when no money is coming in, your mortgage is miles under water, your real estate is near worthless and the tenants can't pay the rent, you have lease payments due but your business has few customers, family have lost their jobs..... i.e., it's a real Depression where all this stuff happens. Those lucky few who had any assets were spending them very sparingly and only on critical necessities.
JW
+1

I've got this book too! Great read. Don't forget losing access to your money in the bank, one of the worst things of all.

I also found it instructive that he spent the decade worrying about inflation and debt, even in the face of 5x lower prices. The workings of currency can be extremely counterintuitive.

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Re: 1929 Crash being a Boglehead?

Post by Ged » Wed Jul 03, 2013 3:47 pm

ogd wrote:
JW Nearly Retired wrote:+1Those lucky few who had any assets were spending them very sparingly and only on critical necessities.
JW
+1

I've got this book too! Great read. Don't forget losing access to your money in the bank, one of the worst things of all.

I also found it instructive that he spent the decade worrying about inflation and debt, even in the face of 5x lower prices. The workings of currency can be extremely counterintuitive.
I found the book quite interesting, however I know the personal experiences of my parents and grandparents who lived during that time. I think the weakness of this book is that it only provides one point of view, and distinctly one from a political minority. If you really want to understand things a wider range of experiences is needed.
Last edited by Ged on Wed Jul 03, 2013 6:06 pm, edited 1 time in total.

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Re: 1929 Crash being a Boglehead?

Post by nisiprius » Wed Jul 03, 2013 4:22 pm

Another thing I learned from the Benjamin Roth book: even if you did have money, and even if your bank did not fail, many of them froze deposits or limited them severely. Bankbooks, the physical passport-sized booklets that recorded your balance at the bank, were apparently transferrable and a market developed in them, and newspapers ran quotes on the rates which brokers were paying for bankbooks from various banks; it might have ranged from $0.75 down to $0.25 on the dollar, depending on the bank.

He also says that there was literally a shortage of money in the sense of physical currency--people hoarded it.

I think hypothetical analyses of what would have happened to an investor who "just" bought and held, or DCAed in steadily, are much too optimistic and do not reflect the conditions of the time. It's not just money that compounds over time, the chance of encountering bad luck does, too. If a chart shows that someone who actually managed to put $15 a month into "good common stocks" would have become rich, that could mean that "everybody ought to be rich," but it could just as well mean that it is difficult to put $15 in month into good common stocks out of the income from selling apples.

It is all reminiscent of the story of the Greek athlete Milo, who "simply" began a regimen of lifting a small calf every day. If you lift a Holstein-Friesland cakf every day, then it is logically inescapable that within two years you will be living 560 kg. But that does not mean that everyone can lift 560 kg. It just means that at some point, most people will reach a point at which they find that they are unable to lift the calf that day.

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Re: 1929 Crash being a Boglehead?

Post by CrossOverGuy » Wed Jul 03, 2013 4:56 pm

I think most Bogleheads probably haven't signed up for margin accounts. I think what wiped out a lot of people were margin calls from their brokers telling them to ante up some more money into their accounts to get up to the level agreed upon; since most everything was going down, down, down, the brokers were forced to liquidate many of their customers' positions and these customers were left with nothing in those accounts. Watching lots of wonderful 1930s movies (with some actor like Eugene Pallette or Adolphe Menjou shouting to "Buy, Buy, Buy!" or "Sell, Sell, Sell!") scared me out of ever wanting to sign up for a margin account.

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Re: 1929 Crash being a Boglehead?

Post by littlebird » Wed Jul 03, 2013 6:15 pm

JW Nearly Retired wrote:
stevewolfe wrote:
Yes, give B. Roth's Depression Diary a read. He was a lawyer with a keen interest in the stock market. Roth repeatedly remarks at the market dips during the decade of depression that if only he had some treasuries or other money, "good stocks" were at real bargain prices. He never did have any money to invest. Nobody he knew had much money. Rebalancing into more stocks is not going to happen when no money is coming in, your mortgage is miles under water, your real estate is near worthless and the tenants can't pay the rent, you have lease payments due but your business has few customers, family have lost their jobs..... i.e., it's a real Depression where all this stuff happens. Those lucky few who had any assets were spending them very sparingly and only on critical necessities.
JW
When I was a kid, in the 40's, there were adults who, with "good" civil service jobs during the depression (teachers, mail carriers) had bought distressed real estate and small businesses with private borrowed money. Their lives and those of their kids were changed for the better. There are always those who can make lemonade etc.

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Re: 1929 Crash being a Boglehead?

Post by Jazztonight » Wed Jul 03, 2013 7:20 pm

littlebird wrote: When I was a kid, in the 40's, there were adults who, with "good" civil service jobs during the depression (teachers, mail carriers) had bought distressed real estate and small businesses with private borrowed money. Their lives and those of their kids were changed for the better. There are always those who can make lemonade etc.
Benjamin Roth notes in his book that at one point the public school teachers in Youngstown, Ohio were NOT being paid, but continued to work in hopes that they'd start getting their paychecks again. Federal employees were getting paid, I'm sure, but in the end, there was just NO cash to be had.

Under Hoover, money was going to certain banks, but there was a lot of theft going on by bank executives. There were strikes by farmers, the unemployed, etc. Doctors and dentists were seeing patients who could not pay them. Roth, a lawyer, did bankruptcy work, but the clients could not pay him.

Landlords had tenants who could not pay the rent, but the landlords had to pay their property taxes or they might lose their buildings to foreclosure.

Roth's Depression Diary is a fascinating read, but it is somewhat depressing to read. :?
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Re: 1929 Crash being a Boglehead?

Post by Ged » Wed Jul 03, 2013 8:41 pm

Jazztonight wrote:
littlebird wrote: When I was a kid, in the 40's, there were adults who, with "good" civil service jobs during the depression (teachers, mail carriers) had bought distressed real estate and small businesses with private borrowed money. Their lives and those of their kids were changed for the better. There are always those who can make lemonade etc.
Benjamin Roth notes in his book that at one point the public school teachers in Youngstown, Ohio were NOT being paid, but continued to work in hopes that they'd start getting their paychecks again. Federal employees were getting paid, I'm sure, but in the end, there was just NO cash to be had.
My two grandfathers had employment during the depression. One was a police officer; his salary actually supported an extended family about the equivalent of three nuclear families who shared a house. Other members of the family did what they could to augment his salary. They had very little, but what they had they shared. It was still much better than what many endured. I think these experiences are why his extended family is closer than most even now.

The other was an Instructor at Phillips Exeter Academy. His income was such that he was able to purchase a family farm and a small quarry in New Hampshire. The quarry income was able to augment his retirement. The farm is now really just a summer retreat belonging to an aunt. My mother inherited the quarry, and she ended up dividing the proceeds of its sale between her children. After division it really was not enough to make a difference in our lives.

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Re: 1929 Crash being a Boglehead?

Post by grabiner » Wed Jul 03, 2013 8:44 pm

Simplegift wrote:Though the 1920-1930 run-up and crash was really in a league of its own for the U.S., one big lesson from the history of market crashes is the consistency of recovery. If one looks at U.S. stock crashes over the last century (chart below), the market invariably overshoots on the downside (from fear and panic), but then over the next 500 days regains a lot of its losses (red lines). This pattern is true world wide, even during the post-war crashes in Japan, Germany and Italy.
This is somewhat misleading. The reason that the market rises considerably in the first 500 days after a bottom is that this must be a period of 500 days in which it never reaches the bottom again; if the market reaches a lower level, that 500-day period isn't counted. For example, we count the 500 days beginning in March 2009, but not the 500 days beginning in October 2008 because the market rose but then fell a bit lower five months later.
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Re: 1929 Crash being a Boglehead?

Post by Chris M » Wed Jul 03, 2013 8:50 pm

JW Nearly Retired wrote:
stevewolfe wrote:A lot of Bogleheads likely would've been in trouble as the posts above really haven't mentioned the dearth of actual cash in circulation. Yes, maybe today the FDIC would protect us from some of that problem, but it just gives a backstop to the hoarding of cash that existed at the time.

Nisi has quoted from Benjamin Roth's "Great Depression a Diary" so often I bought a copy to read. In it he repeatedly mentions that professional people had no cash to invest. Paraphrasing, a doctor was rubbing a $1 bill on the edge of the desk saying that was the only cash he had received in a month.

Were a freeze up like this to happen again, rebalancing with new monies, boldly rebalancing from treasuries or other guaranteed savings accounts into stocks would truly take a will of steel and much more nerve than at any point in my lifetime.
+1
Yes, give B. Roth's Depression Diary a read. He was a lawyer with a keen interest in the stock market. Roth repeatedly remarks at the market dips during the decade of depression that if only he had some treasuries or other money, "good stocks" were at real bargain prices. He never did have any money to invest. Nobody he knew had much money. Rebalancing into more stocks is not going to happen when no money is coming in, your mortgage is miles under water, your real estate is near worthless and the tenants can't pay the rent, you have lease payments due but your business has few customers, family have lost their jobs..... i.e., it's a real Depression where all this stuff happens. Those lucky few who had any assets were spending them very sparingly and only on critical necessities.
JW
Yes, and let's not also forget no way to own the S&P 500 (it didn't even exist), no index funds, no John Bogle to help you, no Modern Portfolio Theory, no Efficient Market Hypothesis, no SEC to protect you, but plenty of inside trading, pools, bear raids (all legal before the Depression), and people like "Sunshine" Charley Mitchell using his City Bank depositors as a ready and naive market for his bank's stock. Prior to the 1920s the stock market was the exclusive preserve of the wealthy. The many small investors who got burned in the Crash were newbies who had no experience of a significant bear market, let alone something as truly frightening as the 1929 Crash. There were no bogleheads then, and furthermore "bogleheadism" was impossible at that time. The question is an anachronism (although nonetheless interesting to think about--mainly as a reminder of how fortunate we are today).
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Re: 1929 Crash being a Boglehead?

Post by fishnskiguy » Wed Jul 03, 2013 9:02 pm

Jazztonight wrote:[quote="littlebird".

Roth's Depression Diary is a fascinating read, but it is somewhat depressing to read. :?
That's one reason they called it a depression and not a recession.

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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 9:39 pm

Chris M wrote:There were no bogleheads then, and furthermore "bogleheadism" was impossible at that time.
Umm... no internet? [Captain Obvious]

I gotta say though, the stock market was at least recognizable. Like, if you were dropped there you would kind of know what to do. The graphs would look familiar. You'd assemble a few Dow stocks together, pepper with some Treasuries, call it a portfolio.

The other aspects of human experience, not so much. Politics was vicious, racist, anti-Catholic, populist, what have you. Over the ponds Europe and Asia were going insane. Hitler. Fear/fascination of communism. Back home, food being dumped while people were starving. Can't go out and have a beer. Most women didn't work and only been allowed to vote for a couple of elections. Literally every profession wildly different; many don't exist yet. You have to wear a hat.

At least we can talk about the stock markets back then. And I think bogleheadism is rooted in the Great Depression in a big way, and I don't just mean the Wellington fund.

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Re: 1929 Crash being a Boglehead?

Post by Chris M » Wed Jul 03, 2013 10:13 pm

ogd wrote:
Chris M wrote:There were no bogleheads then, and furthermore "bogleheadism" was impossible at that time.
Umm... no internet? [Captain Obvious]

I gotta say though, the stock market was at least recognizable. Like, if you were dropped there you would kind of know what to do. The graphs would look familiar. You'd assemble a few Dow stocks together, pepper with some Treasuries, call it a portfolio.

The other aspects of human experience, not so much. Politics was vicious, racist, anti-Catholic, populist, what have you. Over the ponds Europe and Asia were going insane. Hitler. Fear/fascination of communism. Back home, food being dumped while people were starving. Can't go out and have a beer. Most women didn't work and only been allowed to vote for a couple of elections. Literally every profession wildly different; many don't exist yet. You have to wear a hat.

At least we can talk about the stock markets back then. And I think bogleheadism is rooted in the Great Depression in a big way, and I don't just mean the Wellington fund.
Hats are cool, I'm sure everyone wanted to wear them anyway before Kennedy messed things up and went hatless.

ogd, I'm intrigued--when you say bogleheadism is rooted in the Depression, do you mean in the sense that the Depression served as a kind of lesson in the need to control for risk in investing? Or something more?

Chris

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Re: 1929 Crash being a Boglehead?

Post by littlebird » Wed Jul 03, 2013 10:20 pm

"Benjamin Roth notes in his book that at one point the public school teachers in Youngstown, Ohio were NOT being paid, but continued to work in hopes that they'd start getting their paychecks again. Federal employees were getting paid, I'm sure, but in the end, there was just NO cash to be had."

NYC school teachers were paid throughout the depression and in NYC there was ALWAYS "private money" to be had. wink, wink. Books are interesting. Life is more complex.

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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 10:23 pm

Chris M wrote:ogd, I'm intrigued--when you say bogleheadism is rooted in the Depression, do you mean in the sense that the Depression served as a kind of lesson in the need to control for risk in investing? Or something more?

Chris
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Re: 1929 Crash being a Boglehead?

Post by ogd » Wed Jul 03, 2013 10:28 pm

Chris M wrote:Hats are cool, I'm sure everyone wanted to wear them anyway before Kennedy messed things up and went hatless.
I can't get over the fact that you had to put one on when you left the house and remove it at precise moments in your social interactions. Whenever I see them doing that in a film, I feel so ... free.

(So wildly off-topic)

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Re: 1929 Crash being a Boglehead?

Post by Kalo » Wed Jul 03, 2013 11:49 pm

My Dad's relatives had all come to the US to live after the hyper-inflation of post WW1 Germany. They had already seen bank failures. Therefore, they kept cash in their homes. When the US Great Depression hit, some of them had cash and bought up real estate (foreclosed homes perhaps). Just an anecdote.

Regarding the shortages of cash discussed by previous posters and relating to being unable to buy stocks or re-balance a portfolio, I don't totally understand this. If one held treasuries and stocks in a portfolio throughout the period under discussion, couldn't one raise the necessary cash to re-balance by selling whichever asset class had become too large for the desired AA, just as we do today?

I understand that people used margin at the time or joined the stock rally just in time to experience gut wrenching losses. But we're talking about being a mythical Boglehead during that time. I don't see the problem except for the fact that index funds didn't exist. And even at that, they exist today, and the components existed then. So I think the analyses shown are still legitimate. The Roth diary is anecdotal, even if the experience was common. If one started in 1920 or whatever the start point on the analysis is, and made the 50/50 portfolio, they should have been able to re-balance when it was required. No?

Kalo
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Re: 1929 Crash being a Boglehead?

Post by Clive » Thu Jul 04, 2013 2:54 am

Kalo wrote:we're talking about being a mythical Boglehead during that time. I don't see the problem except for the fact that index funds didn't exist. And even at that, they exist today, and the components existed then. So I think the analyses shown are still legitimate .... If one started in 1920 or whatever the start point on the analysis is, and made the 50/50 portfolio, they should have been able to re-balance when it was required. No?
Yes

1933, stock prices were down something like -72% (nominal) from their former highs (24.86 in 1929, 7.09 in 1933). The 3.6% income provided by bonds that year alone would have bought relatively more stock ($3.60 cash, $1 share price = 3.6 shares; $3.60 cash, $0.28 share price = 12.86 shares). So that bond income purchase power in terms of stocks had more than trebled. As CPI had declined from 17.1 in 1929 down to 12.9 in 1933, a 3.5% income from bonds purchase power had risen a third or so compared to general purchase power (bunch of goods that the CPI is based upon). Add on some dividends (albeit much lower amounts than in prior years), and selling some bonds to use the proceeds to buy more stocks and a accumulator investor would have be able to rebalance OK.

Even a retired/withdrawal investor might have been able to get by spending less of income due to lower prices than in prior years and have had a surplus with which to buy additional shares, on top of also having the option to sell some bonds and using the proceeds to buy more stocks.

1 year interest rates had declined a lot over those 1929 to 1933 years, falling from 6% down to less than 1.5%. Some individual bond holdings prices might have risen in reflection of that. A ten year bond bought in 1928 at 3.3% yield, by 1933 and with 5 years remaining might have been priced to a 2% yield (guess) and 6% higher price (capital gain) when being sold earlier than the intended hold-to-maturity date.

The combination of a redeeming bond (oldest bond in the ten year ladder set that had reached maturity), perhaps selling some or all of another bond ladder holding to raise additional cash, dividend income and bond interest received from the laddered set - would appear to likely have covered both rebalancing and income (withdrawals for living expenses) needs IMO.

The issue wouldn't have been so much as being able to have rebalanced - but rather having had the inclination to rebalance at a time when stocks had endured such large declines.

If an investor rebalanced in the 1920's during the period of strong stock price rises, but then froze during the 1930's and failed to rebalance, then the portfolio gains were still broadly similar overall compared to having rebalanced - but where the portfolio became much more bond heavy (30-70 stock/bond like) until the mid 1940's at which time stocks had caught back up with bonds again (back to 50-50 like).

In short, my guess is that bonds would have seen you through the period, but coming out the other side with a prior neat 10 year bond ladder structure having a number of holes shot throughout that ladder (individual rungs missing). By the late 30's/early 40's the neat bond ladder structure could have been re-established.

Perhaps highlights why you should opt for Treasury bonds over corporate bonds (and instead reach for yield by adding more stock exposure rather than reaching for yield on the bond side). When you need bonds to have maintained purchase power value the most, the last thing you want is for such bonds to have increased default risk.

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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 3:17 am

Simplegift wrote:
magneto wrote:...whether we can learn anything from that period of history to safeguard our financial futures.
Though the 1920-1930 run-up and crash was really in a league of its own for the U.S., one big lesson from the history of market crashes is the consistency of recovery. If one looks at U.S. stock crashes over the last century (chart below), the market invariably overshoots on the downside (from fear and panic), but then over the next 500 days regains a lot of its losses (red lines). This pattern is true world wide, even during the post-war crashes in Japan, Germany and Italy.

The lesson is to hang in there, ignore the panic and keep your eye on your long-term goals.

Image
Source: Doug Short
This looks wildly misleading to me. 'regains at lot of its losses'?

What you really mean is 'dead cats bounce'?

Consistency of recovery? Japan has not yet recovered from the 1990s--- that's a 23 year bear market!

In the 1930s markets recovered post 1929, and then crashed again, then recovered, then sank again in 1938-- there was no recovery over the entire decade.

And then there is the 1968-1980 period, where inflation devastated returns.

Note that dividend payouts *tend* to be less volatile than markets (Robert Shiller's original pathbreaking research on excess volatility of markets, in fact) but you cannot *count* on that-- lots of companies in the 1930s suspended their dividends. A commitment to a dividend is not equivalent to a commitment to pay interest on a debt, and can be suspended. Behaviourally, there is evidence that Boards treat dividends as less sacrosanct than they would have in the 1960s, say (I am thinking of 2 famous incidents in the past: Conn Ed cutting its dividend and ICI in the UK cutting its dividend in the early 1990s-- in both cases, repeats (major utilities cutting dividend, bellweather industrial stocks like GE cutting dividend) have passed with relatively little notice in more recent times).

In other words, you cannot count on the income return of stock markets to bail you out from falling stock prices.

The 'lesson' is 'hanging in there' will kill you in a long bear market if you need to spend capital before it is over. The best you can do is hope that you have not got unlucky and hit one of those 20 year bear markets (there was I believe another one after crash of 1873-- but I know less about the financial history of that period).

Also that you hold bonds, because if you are in the midst of one of those bear markets, bonds will preserve capital (danger: there are deflationary bears like Japan and 1929-1939, and there are inflationary bears like 1968-1980-- the lesson is you have to hold both Real Return Bonds (eg TIPS and ibonds) and nominal bonds).
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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 3:23 am

Clive wrote:
wesleymouch wrote:FDIC is not the panacea you think it is. Read about "bail in". In these times custodial risk is as great as market risk.
In the UK a decade or two ago, bank deposits were only covered by the government (if the bank went broke) to the tune or something like 95% of the first $50,000. Anything deposited above that could have been lost if the bank went broke.

The EU in more recent times raised that to something like $135,000 being fully covered - anything above that being at risk if the bank went broke.

The natural tendency was towards spreading deposits across multiple banks, restricting each bank deposit to the government 'insured' amount.

Conceptually the 2008/9 crisis should have exercised that policy first - to make deposits of above the 'insured' amount, together with bond holders, stock holders and credit default swaps to bear the cost of failure first, rather than taxpayers in general.

To date AFAICT only Cyprus and Iceland have exercised the policy. The rest of Euroland have opted to fully cover credit default swaps etc. to bear no risk. If someone buys a credit default swap - then they should bear the risk of losing - and not having taxpayers cover them on a heads they win, tails taxpayers bail them out basis.
I am really confused. When you say 'the rest of Eurloand have opted to fully cover Credit Default Swaps (CDS)?

What do you mean? CDS are bilateral private contracts-- normally between financial institutions, or financial institutions and hedge funds. In the case of Greece, an outright default was avoided, as I understand it, therefore the CDS did not trigger.

http://www.telegraph.co.uk/finance/fina ... -ISDA.html

Are you referring to the US government's decision to bail out AIG during the crash? That was about CDOs-- insurance taken out by banks against CDO tranches they had bought, which were backed by US mortgages. That's entirely separate from banking restructuring going on in the Eurozone.

The whole point of a CDS is to protect against default. So if someone buys a CDS, they should NOT suffer a loss if the insured credit defaults, that is the whole point of buying a CDS.

Being bilateral and OTC, a CDS does have full counterparty risk-- the AIG problem (AIG was the seller, the investment banks were the buyers). Hence the move from the regulators to try to get CDS to be exchanged cleared, rather than over the counter (OTC).

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Re: 1929 Crash being a Boglehead?

Post by Clive » Thu Jul 04, 2013 3:25 am

I understand that people used margin at the time or joined the stock rally just in time to experience gut wrenching losses
If you look at the gains during the roaring 20's, stock prices doubled, doubled again and more - up to the 1929 high.

Look at Japan 1980's to their 1990 peak and a similar pattern is evident.

After such gains prices can decline back down again just as fast (or faster) - as they did during the Wall St Crash and Japan post 1990 years.

Exceptionally strong gains during the past decade or so are perhaps a warning to avoid/defer buying - as there's a risk that the subsequent decade or so could endure sizeable declines back down again. Over the last 10 years or so for instance gold has doubled, doubled again and more - which has attracted greater interest for investors to buy/hold some gold, but that could be doing so at the worst possible time (after such hard and fast gains).

Really bad investments tend to arise due to having bought in when the asset was raging (greed), and then later selling out when prices had collapsed (fear). Peak to trough. Really good investments tend to arise out of taking the complete opposite stance (Warren Buffett style), selling to the greedy, buying from the scared. Avoid buying peaks (during/after strong recent gains), selling troughs (during/after strong declines), combined with 50-50 rebalancing (to further cost-average over time (add when low/reduce when high)) and 'average' overall gains tend to be sufficient/adequate.

Oddly that can be difficult to do, as when it comes to stocks there's an attraction to buy things that have risen strongly in recent times and avoid things that had declined in recent times. Investors appear to look at the rear view and anticipate those patterns will continue. Using the same approach as you would to buy groceries is perhaps a better mentality. If you go to your grocery store and the price of tinned soup had doubled recently you don't get excited and buy more than you would normally just because prices were up, but rather you might not even buy any soup that week. If instead soup were on discount and half priced, then you might opt to buy some additional tins to stock up with at those lower prices.

When you shop for stocks, put on your frugal little ol' lady grocery shopper hat.

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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 3:33 am

Kalo wrote:My Dad's relatives had all come to the US to live after the hyper-inflation of post WW1 Germany. They had already seen bank failures. Therefore, they kept cash in their homes. When the US Great Depression hit, some of them had cash and bought up real estate (foreclosed homes perhaps). Just an anecdote.
And had they done the same thing in 1968, say, they would have been trashed. Adjusted for inflation and tax, the returns to cash were very poor for the next 12 years (although, to be fair, better than bonds or stocks-- if you just held 90 day T Bills you lost money, but less money than the other strategies).

The German hyperinflation is pretty unique. It obeys the rule that hyperinflations tend to follow major political disasters (losing the bloodiest war in human history to that point, in fact, plus abortive revolutions from both the communists (Rosa Luxembourg) and the fascists (the Munich 'beer hall' putsch), plus a French occupation of the major industrial centres because Germany had fallen behind on its war reparations payments). Other countries that have had hyperinflation in Europe have tended to follow that pattern. However in the cases of Israel, Turkey and Latin America, the hyperinflation was a product of domestic politics and monetary policy.
Regarding the shortages of cash discussed by previous posters and relating to being unable to buy stocks or re-balance a portfolio, I don't totally understand this. If one held treasuries and stocks in a portfolio throughout the period under discussion, couldn't one raise the necessary cash to re-balance by selling whichever asset class had become too large for the desired AA, just as we do today?
So one would think. However bonds and stocks went down together in the last few weeks, so the total portfolio was in fact smaller. Therefore rebalancing might not even have been necessary.
I understand that people used margin at the time or joined the stock rally just in time to experience gut wrenching losses. But we're talking about being a mythical Boglehead during that time. I don't see the problem except for the fact that index funds didn't exist. And even at that, they exist today, and the components existed then. So I think the analyses shown are still legitimate. The Roth diary is anecdotal, even if the experience was common. If one started in 1920 or whatever the start point on the analysis is, and made the 50/50 portfolio, they should have been able to re-balance when it was required. No?

Kalo
You could ie synthesize the return. Just as long as you remember:

- it's fictional
- it's taxes that determined a lot of what people did and did not do-- there were few if any tax sheltered accounts (none essentially) and post 1930 governments raised taxes significantly to reduce deficits (along with chopping spending) and once WW2 got going tax rates went to 80% and stayed that way into the 1970s in the UK case (up until President Kennedy in the US case-- I think Congress passed the tax cut bill in the lame duck session post his assassination in fact)

In practice in the 1930s the main concern was losing your job-- so people hoarded cash. Labour income was what was threatened, making investors ultra cautious.

So you avoided realizing capital gains, and your after tax, after inflation returns from dividends and fixed income were strikingly poor.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Thu Jul 04, 2013 3:39 am

Valuethinker wrote:I am really confused. When you say 'the rest of Eurloand have opted to fully cover Credit Default Swaps (CDS)?
Yes, Ged made a good point in response to what I posted http://www.bogleheads.org/forum/viewtop ... 2#p1740480 - as have you.

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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 3:44 am

brianbooth wrote:Not really specific to the crash but more to the depression in general, the key lesson was to own treasuries. Not only were the Feds the only ones paying their bills but rates slowly fell between 29 and WWII so even with rates low (3.6% => 2%), there would have been some price gains to make up for it. If, like many bogleheads, you had a significant portion of your money in T-Bonds (preferably long-term ones), you'd have been feeling pretty darned good about your finances.
As long as one remembers that the 1941-1946 (UK 1939-1952) period is totally anomalous-- prices were controlled, interest rates were restricted. The economic and market statistics are fairly misleading. So there was this catchup inflation post 1946. The postwar slump, as in 1919, was brutal, but unlike 1919 it was extremely short-- the veterans came home, the GI Bill and various housing acts kicked in, leading to an explosion of housebuilding, car buying etc. and the Baby Boom started arriving 9 months later-- Baby Booms cause economic stimulation.

From memory the US Treasury unilaterally lowered interest rates in the 1930s? The UK Treasury did so (UK bonds were structured as annuities, so, again from memory, they brought in all the 3 1/2% annuities (ie bonds) and reissued them at 2 1/4%)-- they had the legal power to do this because government debt was structured as annuities.

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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 3:51 am

Clive wrote:
Valuethinker wrote:I am really confused. When you say 'the rest of Eurloand have opted to fully cover Credit Default Swaps (CDS)?
Yes, Ged made a good point in response to what I posted http://www.bogleheads.org/forum/viewtop ... 2#p1740480 - as have you.
I have the distinct impression that you do not understand what a CDS is.

A CDS is an insurance contract. I pay you a fixed premium (usually based on cost to insure 10m of debt) for a period, typically c. 10 years. In return, if there is a default, I undertake to give you the legal title to that debt (for you to pursue in recovery in the courts) and you give me the 10m face value. These are bilateral contracts between private parties.

Greek government bondholders took a c. 50% haircut by the way.

The question of 'bail in' is difficult. The result of the 'bail in' in the case of Cyprus is that if any southern European bank looks wobbly, the money is going to flood out. The provider of liquidity then becomes the European Central Bank-- replacing all those lost deposits. At which point, if the bank goes bust the hit will fall on the Eurozone taxpayer.

Whilst with bondholders there is a case for a 'bail in' there is a much weaker case for depositors holding more than 100k Euros. That latter insistence on a bail in the case of Cyprus nearly destabilized the entire Eurozone banking system, and it makes depositors in Slovenia, Malta, Portugal all very wary. There's plenty of people who are not Russian money launderers who hold more than 100K Euro deposits-- people who are buying and selling a small business, or a property, for example. in the Cyprus case, they have lost *60 per cent* of their savings.

Even in the Irish case whilst there is a case that the Irish taxpayer should not have covered the bond holders, cutting the deposit protection at the 30,000 Euro level (or even the 100k level now pertaining) would have caused a mass panic.

Note in the case of the Co-Op bank in the UK, the bondholders have hired a hot shot restructuring lawyer to fight their case on the bail in, so, again, the consequences could be quite significant.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Thu Jul 04, 2013 4:12 am

Valuethinker wrote:I have the distinct impression that you do not understand what a CDS is
Correct - just a very basic understanding - I've never been involved in any way with such - and thanks.
Valuethinker wrote:it's taxes that determined a lot of what people did and did not do-- there were few if any tax sheltered accounts (none essentially) and post 1930 governments raised taxes significantly to reduce deficits
Looking at the US tax rates in the 1917/21 years http://forbestadvice.com/Money/Taxes/Fe ... story.html during which treasury yields were artificially suppressed and at times inflation raged, the combination of taxes and inflation could (would) have been devastating for investors (indirect form of confiscation).

How might an investor hedge such risk? I'm thinking along the lines of an offshore low tax holding company perhaps from which investments are bought/sold and where the domestic taxation only applies to repatriated amounts (which might be timed to be less prone to 'confiscations')?

Whilst I accept paying a fair level of tax - the risk of a potential near total 'confiscation' via (unfair) taxation/inflation is daunting.

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Re: 1929 Crash being a Boglehead?

Post by Valuethinker » Thu Jul 04, 2013 5:39 am

Clive wrote:
Valuethinker wrote:I have the distinct impression that you do not understand what a CDS is
Correct - just a very basic understanding - I've never been involved in any way with such - and thanks.
Valuethinker wrote:it's taxes that determined a lot of what people did and did not do-- there were few if any tax sheltered accounts (none essentially) and post 1930 governments raised taxes significantly to reduce deficits
Looking at the US tax rates in the 1917/21 years http://forbestadvice.com/Money/Taxes/Fe ... story.html during which treasury yields were artificially suppressed and at times inflation raged, the combination of taxes and inflation could (would) have been devastating for investors (indirect form of confiscation).

How might an investor hedge such risk? I'm thinking along the lines of an offshore low tax holding company perhaps from which investments are bought/sold and where the domestic taxation only applies to repatriated amounts (which might be timed to be less prone to 'confiscations')?
I do not believe that is a correct interpretation of UK tax law for domiciliaries. You would be taxable on any dividend the company paid you.

Whilst I accept paying a fair level of tax - the risk of a potential near total 'confiscation' via (unfair) taxation/inflation is daunting.
'unfair' is a judgement based on the time we are in history. When your country is facing an existential threat like the Nazi menace, no level of taxation is 'unfair'-- because your neighbour gets to sit at the door, waiting for the black car to arrive with the telegram 'Re your Son. Dear Madame, we regret to inform you...'.

In my life people have called 'unfair': rates (property taxes), then the Poll Tax, then the Council Tax, the VAT on utilities (5%), petrol taxes, London transport fares, cigarette taxes, alcohol duty.... it all, really, depends upon where you are coming from...

Offshore accounts in this day and age do not protect you unless you wish to participate in tax evasion-- which is illegal.

However the UK no longer has exchange controls so you can hold overseas assets. As long as you do not sell assets, you are not liable for capital gains taxes. Your interest and dividend income will still be taxable however.

The UK still has plenty of wealthy people-- they tended to hold their wealth in land-- like the Saxe Coborg Gotha Family for example-- the Duke of Westminster, the Queen's cousin, is the country's richest single landowner via the Grosvenor Estate (owns most of Mayfair). The De Waldens own Marylebone. Paul Raymond's estate owns much of Soho, etc.

Or you can emigrate. Many writers moved to Ireland in the 60s and 70s (where income tax was set low for income from writing royalties). Or Switzerland. Jack Higgins moved to Jersey, Guy Hands and Jon Moulton (private equity) are residents of Guernsey, etc. Note to emigrate you are limited to (60) days a year in the UK including the day of your arrival but not of departure.

Sir Philip Green's wife lives in Monaco, so when BHS/ Top Shop paid a £1.5bn dividend, she paid no tax on that (he stayed resident in the UK).

Note as I understand it you *do not* pay tax on the indexation of Index Linked Gilts, that's why their yields are so low. So the phantom taxation from inflation problem does not occur. 25% of all UK government debt is ILG.

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Re: 1929 Crash being a Boglehead?

Post by Clive » Thu Jul 04, 2013 10:32 am

How might an investor hedge such risk? I'm thinking along the lines of an offshore low tax holding company perhaps from which investments are bought/sold and where the domestic taxation only applies to repatriated amounts (which might be timed to be less prone to 'confiscations')?
I do not believe that is a correct interpretation of UK tax law for domiciliaries. You would be taxable on any dividend the company paid you.
I'm not in any way suggesting tax evasion, rather tax deferral - and preferably where you get to decide the timing of that repatriation (taxation).

http://www.pru.co.uk/investments/bonds/ ... shore_tax/

The main tax benefit of investing in an offshore bond is gross roll-up.

Perhaps something like http://www.fundslibrary.co.uk/FundsLibr ... cf9e6265af (but at a 1.3% yearly management charge that particular example is somewhat expensive IMO).

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Re: 1929 Crash being a Boglehead?

Post by Chris M » Thu Jul 04, 2013 10:47 am

ogd wrote:
Chris M wrote:ogd, I'm intrigued--when you say bogleheadism is rooted in the Depression, do you mean in the sense that the Depression served as a kind of lesson in the need to control for risk in investing? Or something more?

Chris
That -- plus thrift, patience, avoiding speculation and concentration, and a healthy dose of skepticism.
Ah, yes--it taught the values behind being a boglehead. I got most of those values from my parents, who lived through the Depression. Seems like my generation (baby boomers) did a poor job of passing those values on. And so today there aren't as many investors following a boglehead approach as there ought to be.

Chris M
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Joined: Tue May 28, 2013 6:25 pm

Re: 1929 Crash being a Boglehead?

Post by Chris M » Thu Jul 04, 2013 11:14 am

Valuethinker wrote:
Simplegift wrote:
magneto wrote:...whether we can learn anything from that period of history to safeguard our financial futures.
Though the 1920-1930 run-up and crash was really in a league of its own for the U.S., one big lesson from the history of market crashes is the consistency of recovery. If one looks at U.S. stock crashes over the last century (chart below), the market invariably overshoots on the downside (from fear and panic), but then over the next 500 days regains a lot of its losses (red lines). This pattern is true world wide, even during the post-war crashes in Japan, Germany and Italy.

The lesson is to hang in there, ignore the panic and keep your eye on your long-term goals.

Image
Source: Doug Short
This looks wildly misleading to me. 'regains at lot of its losses'?

What you really mean is 'dead cats bounce'?

Consistency of recovery? Japan has not yet recovered from the 1990s--- that's a 23 year bear market!

In the 1930s markets recovered post 1929, and then crashed again, then recovered, then sank again in 1938-- there was no recovery over the entire decade.

And then there is the 1968-1980 period, where inflation devastated returns.
According to this article http://money.msn.com/investment-advice/ ... arketwatch, if you look at the entire market, include dividends, and take deflation into account then it took a little over 7 years for the market to recover from the 1929 Crash.

The longest recovery from the S&P 500 bear markets that occurred since 1970 (1973-74, 1980-82, 1987, 2000-02, and 2007-09) was a little over 4 years (based on S&P 500), for the 2000-02 bear market. My understanding is that a 60/40 portfolio with a 4% withdrawal rate and annual adjustments for inflation has been backtested for a 30-year retirement all the way back to 1926, and survived all periods. Hanging in there will not kill you, it's the smartest thing to do. Granted Japan is an exception--are there any others?

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